CheetahhhhhhhBlog Mark III

Tristan is growing teeth and is very cranky about it.

Last week I advised my mom to go into cash with her retirement portfolio, primarily because market direction is very unclear at the moment, with a bias toward down. This is fine for me, an options seller. I’m making good money actually. However for the rest of you, you’ve probably lost a good chunk of money recently. The financial press is making a lot of noise about how the Dow closed below 10,000. My observations on the market are as follows.

First, the market was due for a correction in the bull market, indeed everybody was warning about it in January, so in many respects this is no surprise. In this scenario, the market will likely rebound strongly and go to new highs.

Second, the big concern on Wall Street is sovereign debt, specifically Greece, Portugal, and Spain, none of whom are entirely fiscally transparent or fiscally responsible. Spain in particular made a lot of money during the housing boom (Brits and Germans building summer houses on Ibiza), and is now back to the norm, which is high unemployment and not a lot of economic prospects. However it is, in my mind, simply inconceivable that the EU would let a member state default on sovereign debt. This would spell the death of the Euro and the union. Germany and France are not going to outright say they will bail out Greece, and indeed they like the current situation because the Euro is dropping. The high Euro was killing their exports. However it is impossible to say when the sovereign debt issue will be resolved. But to put it in the big picture, Greece is something like 2% of the European GDP, so the whole Greek crisis is actually a bit irrelevant. Their economy is the size of Maryland’s.

Third, the Fed will undoubtedly start raising rates, which will cause the market to drop in the short term. But this will not occur in the near term. I read in the Financial Times that it will not occur before September. I don’t know where they get their information. The Fed will warn us before they raise rates. People getting nervous about rate hikes are jumping the gun early, and the market is attempting to start pricing in the rate hike. In this scenario, there is a downward bias.

Fourth, there is very strong support for the indexes right below their current closes, specifically the 200EMA and the 50% Fibonacci retracement. In this scenario, we are likely at the bottom of the decline and it would be wise to buy now.

In conclusion the market is very unclear right now and there is a decent possibility it will remain unclear for a while. My advice to my mother was to stay in cash until the situation clarifies.